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Debenhams - Refinance complete, ball in SPD's court

Nicholas Hyett | 29 March 2019 | A A A
Debenhams - Refinance complete, ball in SPD's court

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Debenhams has completed its £200m refinancing, and set out options for its future.

Unless Sports Direct makes a bid for the company, underwrites a rights issue, or provides additional funding the company will be taken over by lenders and the value to shareholders will fall to zero.

Separately Sports Direct have said that they are still evaluating a potential bid for the company despite the completion of the refinancing.

Debenhams shares rose 43.5% following the announcement to 3p.

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Our view

We've reached the endgame for Debenhams. Lenders have stumped up £101m to keep the company's head above water, but won't release the remaining £99m until Sports Direct agrees to a bailout. Without Sports Direct's support, Debenhams can only access the extra funding by handing itself over to lenders.

The ball's now firmly in Mike Ashley's court.

The terms of the refinance set out two routes for Sports Direct to hang onto its shares. Sports Direct could go ahead with its proposal to buy the business, so long as it agrees to repay the company's debt and provides additional funding going forwards. Alternatively Sports Direct could agree to underwrite a wider rights issue or provide additional debt finance.

Neither are attractive options.

Regardless of the outcome Debenhams plans to carry on with its restructuring of the store estate, negotiating rent reductions and closing stores where necessary. The company's now more focused on employees, pension holders, suppliers and lenders than shareholders, as it seeks to keep its shops trading.

Debenhams shareholders' fate lies in Mike Ashley's hands. An acquisition of the company might see investors recover some value - and Sports Direct have so far left that option on the table. But a rights issue would see them dramatically diluted and the alternative is a total equity wipeout.

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Trading Statement (5 March 2019)

Although trading has improved slightly in the post-Christmas period, overall conditions remain challenging for Debenhams. Together with ongoing restructuring, this means the group no longer expects to meet market expectations for full year profits.

Further details will be given in its interim results, expected next month.

In the first half of the year, gross transaction value (GTV) and like-for-like (LFL) sales dropped 5.4% and 5.3% respectively. That reflects a slight improvement on the first 18 weeks of the financial year.

The UK, which accounts for the lion's share of revenues, underperformed the wider group, with like-for-likes down 6%, while the international business saw a 2.3% decrease.

Online sales across the period improved 2%.

Debenhams said it's on track to deliver £80m in annual cost savings going forwards. That includes the closure of around 50 stores and a sourcing partnership with Hong Kong based Li & Fung. The first new ranges from the partnership will be in store for the current season.

In addition to the £40m bridging facility secured earlier this year, the group is exploring options to restructure its balance sheet, in order to meet future funding needs.

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